The Bank of England has lowered interest rates for the second time this year, in an encouraging sign that the Budget announcement has not knocked market confidence.
Many borrowers will be breathing a sigh of relief today as the outlook for mortgage rates improves once more, thanks to the Monetary Policy Committee’s (MPC’s) vote to bring down the base rate once more. It now sits at 4.75% after a 25bp fall from 5%, having been held at 5.25% since August last year.
The positive move in interest rates is expected to progress over the coming months, according to Bank of England governor Andrew Bailey, who said: “It is likely that interest rates will continue to fall gradually from here”. This will depend on inflation remaining close to its 2% target, which it has done in recent months.
Over the course of this year, lenders have already reduced the interest rates on their mortgages as economic confidence has improved. Mortgage holders sitting on their lender’s standard variable rate (SVR), or those on tracker rates, will see an immediate fall in their rate, while those set to secure new fixed rates soon may find some more favourable options available.
This is expected to have a positive knock-on effect on the property market, with homebuyers and property investors enjoying better borrowing environment now than a year ago, with rates already around 1% down over the last 12 months. Any boost to affordability tends to pull investors off the fence, who may have been waiting until the mortgage market improved further.
Mortgage lending is on the rise
While following house price trends and transaction numbers can certainly give a good indication of the health and the outlook of the property market, another useful measure can be to track mortgage activity, which is often linked to interest rates.
According to the Bank of England’s most recent Money and Credit Report, net mortgage lending in the UK increased by 0.9% in the year to September, which was up from 0.7% in August. This represents a boost in confidence from buyers and investors, who are willing to borrow to buy in a housing market that is showing continued resilience.
This latest cut to interest rates could see activity in the mortgage space ramp up further, with more appetite and growth in transactions between now and Christmas, just as the market would normally be slowing down.
Paresh Raja, CEO of Market Financial Solutions, reiterates this view: “The market will breathe a sigh of relief. A cut always looked likely, but the turbulence of the past week – the Budget and US election – could have encouraged the Bank of England to hold. Lenders are able to pass lower rates on to borrowers, providing a much-needed boost to homebuyers and property investors alike.
“We anticipate that the market will gain momentum in the coming weeks as it adjusts to a more accommodating – though still challenging – monetary environment.
“The past few months have provided a timely reminder that the actions of Threadneedle Street typically exert a greater influence on market activity than decisions made in Westminster. The house price growth following the Bank of England’s last rate cut in August reflects this impact, and today’s cut should inspire further confidence. It’s therefore crucial that investors prepare for a likely surge in market activity and position themselves to seize any opportunities that could soon emerge.
“However, it’s important to recognise that interest and mortgage rates remain significantly higher than pre-December 2021 levels. As a result, securing suitable financing options will still be a significant challenge for some borrowers – this is where the specialist lending sector will continue to play a vital role. To help build momentum in the property market, lenders must now step up and focus on providing a diverse range of bespoke and flexible financial products that can meet the specific needs of brokers and their clients.”
Lowered interest rates offer brighter outlook
Tim Parkes, CEO of RAW Capital Partners, shares that the Budget has not impaired market confidence, as some may have feared, which could have led to interest rates being held.
He said: “The main threat to an interest rate cut today was the fallout from the Autumn Budget. The Bank was evidently reassured enough by the reaction of the markets, although the Chancellor’s growth-focussed policies did result in an uptick in the OBR’s inflation outlook, which could have heightened tensions ahead of today’s vote on the base rate.
“Evidently the MPC does not view Reeves’ stimulus as substantial enough to justify delaying cuts, suggesting that we are in a transitionary phase where a more accommodative monetary stance is increasingly favoured on Threadneedle Street.
“Decelerating wage growth likely supports this view, though it’s important to note that the Budget may slow the pace of future cuts. Indeed, with services inflation still a persistent issue and consumer spending expected to rise over the festive season, the CPI could tick up in the coming months, potentially resulting in a slower pace of base rate cuts than previously predicted.
“That said, the bigger picture is encouraging. Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans. Looking ahead to 2025, we expect specialist finance demand to grow, provided that brokers and lenders can support borrowers with the financial products and expertise they will need to navigate the changing political and economic landscapes with confidence.”
Interest rates versus swap rates
Lenders consider the central bank’s interest rates as well as swap rates when setting out their mortgage products, with swap rates typically being a reflection of how interest rates are expected to perform in the future. Swap rates actually increased after the Budget was announced, and lenders had already brought down some of their mortgage rates ahead of this.
This means the mortgage market may not be bringing interest rates down immediately, although the expected direction of travel is downwards.
However, buyers are currently finding average two-year fixed rates of 5.39%, according to Moneyfactscompare, down from 6.29% this time last year. In the five-year mortgage space, interest rates have reduced from 5.86% last November to 5.09% now, so borrowers are certainly in a better position now than they were 12 months ago when looking solely at rates.
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